Can the Global Economy Activity Predict Cryptocurrency Returns

Abstract

We investigate whether the global economic activity (GEA) index provided by Kilian (2009) can predict the dynamics of the cryptocurrency. First, we find that the lagged two-month GEA index can predict positively the cryptocurrency monthly returns, especially for Bitcoin. It implies that the investor tends to invest more in the Bitcoin when the economic condition was good two months ago. Furthermore, Bitcoin investors would decrease (increase) their investment when the decline (rise) of the S&P 500 index. In addition, we find the Bitcoin return predictability of the GEA index only exists in the one-month-ahead period.

Keywords: Bitcoin, Cryptocurrencies, Global Economic Activity Index

JEL Classification: C22, G15, D81